In the year after it completed its late-2016 acquisition of smaller rival Virgin America, Alaska Air Group (NYSE: ALK) went on a growth spree in California. This included adding more than a dozen new routes in San Francisco, Virgin America's largest base of operations.
In early 2018, Alaska acknowledged that many of its new California routes were performing poorly, due partly to stiff competition from Southwest Airlines (NYSE: LUV) and United Airlines (NASDAQ: UAL), the top two airlines in the state. As a result, Alaska cut many of the routes it had added in 2017, as well as some that it had inherited from Virgin America.
Alaska Airlines' 2017 expansion in California had mixed results. Image source: Alaska Airlines.
Since then, Alaska Airlines has focused its growth on its home territory: the Pacific Northwest. However, the carrier plans to return to growth in California in 2020, albeit with a more surgical approach to expansion.
Alaska Airlines faces two formidable competitors in California
A substantial chunk of Alaska Air's growth in California during 2017 came in San Francisco. That put it into competition with United Airlines, a rival that has become extremely aggressive about protecting its market share in recent years.
United operates about 300 daily departures in San Francisco, whereas Alaska operates just 133 daily departures across all three Bay Area airports combined. United responded to Alaska's growth in San Francisco by adding even more capacity to the market. United Airlines has been able to maintain its status as the preferred airline there by offering a broader route network and more schedule options on each route -- not to mention aggressive pricing.
Elsewhere in California, Southwest Airlines reigns supreme. The low-fare airline had a similar reaction to Alaska's 2017 growth spurt in the state. Southwest countered by adding more flights at several airports in California and rolling out California-only frequent-flier promotions to further solidify the loyalty of its customer base.
Southwest responded aggressively to Alaska Airlines' growth in California in 2017. Image source: Southwest Airlines.
Considering this context, it shouldn't be too surprising that Alaska Air's growth in California had very mixed results. Some routes have become successful, while others quickly proved unsustainable. As Alaska retreated from various California routes during 2018, the competitive environment there gradually became more rational.
Alaska Airlines prepares for a new growth phase
On Wednesday, Alaska Air announced a slew of new service from its hubs and focus cities in California that will start up in the first half of 2020. It will launch eight new routes and add extra trips on seven existing ones.
From San Francisco, Alaska will launch twice-daily service to Spokane, Washington, along with daily flights to Anchorage, Alaska, and Redmond/Bend, Oregon. From Los Angeles, it will begin flying twice a day to Spokane and Boise, Idaho, and once a day to Missoula, Montana, and Redmond/Bend. Lastly, it will add daily flights between San Diego and Redmond/Bend. All of these new routes, except San Francisco-Anchorage, will be operated with E175 regional jets.
Meanwhile, Alaska will add a seventh daily flight from San Francisco to Orange County, California, and a second daily San Francisco-Chicago flight. From San Diego, it will increase service to Boise; Boston; Orlando, Florida; San Jose, California; and Santa Rosa, California.
Focusing on its strengths
It's noteworthy that all eight new routes that Alaska Airlines announced this week will connect California to the Pacific Northwest, a region where Alaska is the top airline. (For example, as of 2016, it held more than 50% market share in Redmond/Bend.) A couple of the routes getting extra flights serve the Pacific Northwest, too.
By focusing its growth on routes connecting California (where it is the upstart) to the Pacific Northwest (where it is the entrenched leader), Alaska Airlines is playing to its strengths. As a result, the new routes are more likely to be successful than many of the routes introduced in 2017.
Several of the routes where the company is adding extra flights are more competitive, but in those markets, the performance of Alaska's existing flights should give the carrier a good sense of the demand for its service. Southwest Airlines and United Airlines may still respond to this recent growth announcement. However, this time around, they probably won't be able to upend Alaska Airlines' growth plan in California, as they did back in 2017.
With Alaska Airlines currently trading for just 10 times its projected 2019 earnings and gearing up for a return to growth, the company looks like a great stock for long-term investors to buy.
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Adam Levine-Weinberg owns shares of Alaska Air Group and Southwest Airlines. The Motley Fool owns shares of and recommends Southwest Airlines. The Motley Fool recommends Alaska Air Group. The Motley Fool has a disclosure policy.
Alaska Airlines Returns to Growth in California was originally published by The Motley Fool